Heads of Bankrupt China Medical Indicted on Fraud

BROOKLYN, N.Y. (CN) –The two top officers of the bankrupt China Medical Technologies are on the run, federal prosecutors said Monday after charging the duo with a nearly half-billion-dollar securities fraud.

Xiaodong Wu, 59, is the CEO and founder of China Medical, which filed five years ago for Chapter 15 bankruptcy protection in the Southern District of New York.

The indictment unsealed Thursday charges both men, who are residents of China, with securities fraud, securities fraud conspiracy and wire fraud conspiracy.

Prosecutors say Wu and Tsang’s seven-year scheme began in 2005. They allegedly misrepresented how the company would use the proceeds of two note offerings, then stole the invested funds totaling $426 million.

“As alleged, Xiaodong Wu and Samson Tsang deceived unsuspecting investors who thought they were investing in a NASDAQ-listed medical device company but whose investments were stolen and fraudulently transferred to entities in China controlled by Wu and Tsang,” Acting U.S. Attorney Bridget Rohde said in a statement.

China Medical issued the first series of notes on or about Nov. 21, 2006, according to the indictment.

That series included $150 million of 3.5 percent convertible senior subordinated notes due 2011. On or about Aug. 15, 2008, the company issued $276 million of 4 percent convertible senior notes due 2013.

Prosecutors say the third series, released on Dec. 6, 2010, included $150 million of 6.25 percent convertible senior notes due 2016.

But the intellectual property that was the subject of the note offerings was largely worthless, according to a press release from the government, which describes such IP as approximately 20 years old and off-patent.

“To date, $246.5 million of the 2013 notes and $150 million of the 2016 notes remain outstanding,” a statement from the Justice Department says.

In connection for the notes due in 2013 and 2016, prosecutors say, the offering memoranda that Wu and Tsang issued indicated that the proceeds would go toward “general corporate purposes, for the acquisitions of businesses, products and technologies and to repurchase outstanding convertible notes.”

“Contrary to these representations,” the statement from the U.S. Attorney’s Office continues, “most of the money raised through the 2013 notes and the 2016 notes was eventually transferred by Wu and Tsang to entities controlled by Wu, Tsang and their co- conspirators.”

Prosecutors say approximately $303.75 million of the approximately $576 million that China Medical raised in its three note offerings was transferred between Nov. 3, 2006, and Dec. 4, 2008, to an entity that was owned by an associate of Wu and Tsang.

Of that, “approximately $202 million was subsequently transferred to bank accounts controlled by Wu,” according to the statement.

“To execute their fraudulent scheme, Wu and Tsang caused China Medical’s independent director and outside auditor to resign, stopped making public disclosures of material events affecting the value of its securities and stopped making interest payments on the notes,” the U.S. attorney’s statement says.

U.S. District Judge Kiyo Matsumoto caught the case in Brooklyn. If convicted, Wu and Tsang face up to 20 years in prison each.